HMRC may charge a penalty where a tax return or other document contains an error (inaccuracy) that gives rise to a loss of tax. The penalty is calculated as a percentage of the amount of tax at stake (the potential lost revenue).  

The penalty percentage falls into one of six ranges determined by: 

• the nature of the error (ie, if the error was: made despite taking reasonable care; careless; deliberate; or deliberate and concealed); and 
• how HMRC found out about it (ie, whether the disclosure was prompted or unprompted). 

The penalty range for a careless error is 0% to 30%.  

Suspension

HMRC has the power to suspend a penalty for a careless error for up to two years where to do so would encourage the taxpayer to avoid becoming liable for such penalties in the future (CH405050).  

The challenges around the suspension of penalties for one-off errors are highlighted by the recent decision of the Upper Tribunal in Philip and Debra Cox v HMRC [2026] 00007 (TCC). This was the first time that a case around HMRC’s decision not to suspend a penalty for careless error had been heard at the Upper Tribunal (UT).  

Mr and Mrs Cox had claimed what it is now business asset disposal relief (BADR) on the sale of shares in a company. However, it later became clear that they did not meet the conditions for claiming BADR as this did not hold at least 5% of the ordinary share capital of the company.  

HMRC charged penalties for a careless error and the couple requested that the penalty be suspended. When HMRC refused, Mr and Mrs Cox appealed to the First-tier Tribunal (FTT) where the FTT ruled in favour of HMRC. The UT has now upheld the decision of the FTT that HMRC was within its rights not to suspend the penalties.  

At the heart of the case was HMRC’s conclusion that it was not possible to set a SMART suspension condition (ie, specific; measurable; achievable; realistic; and time bound). HMRC’s guidance says that “a penalty cannot be suspended where it is not possible to set specific conditions that will prevent a careless inaccuracy happening in the future” (CH405050). 

Counsel for Mr and Mrs Cox argued that, by applying its SMART criteria, HMRC had “effectively ruled out suspension in cases of isolated or one-off inaccuracies”. HMRC argued, and the Upper Tribunal accepted, that this was not the case, ie, suspension is “not automatically precluded” where there is a one-off error.  

The UTT found that existing legislation does not require there to be a link between the type of inaccuracy that gave rise to the penalty in question and the type of inaccuracy that could arise in future. In other words, the problem was not that the Coxs were unlikely to sell shares in the future, but rather that the nature of their otherwise good tax compliance record meant that the Coxs had not proposed a condition that would reduce the risk of future inaccuracies.

Looking ahead

Between March and June 2025, HMRC consulted on options to simplify the penalties regime, including the rules and processes for suspending penalties. Having acknowledged criticisms made earlier (eg, low awareness levels; time consuming for taxpayers; inconsistent application) and the burden placed on HMRC, the government put forward two options, which included replacing penalty suspension with a ‘caution’. 

In November 2025, the government announced that it “will consider replacing HMRC’s ability to suspend penalties for careless errors with the ability to issue warnings for a first, careless inaccuracy”. At this stage, it is not clear how a new system would work. However, ICAEW welcomes the government’s commitment to reforming the rules in this area, and its announcement that the new approach may extend to failures to notify, which ICAEW called for in its response to the consultation (ICAEW REPRESENTATION 45/25).